There are clear rules that govern who can invest in a private company and how much they can invest. In Australia, a company can raise capital through a formal disclosure document, or under the specific exemptions allowing a company to capital raise without using formal disclosure documents.
Chapter 6D of the Corporations Act (the Act) requires disclosure documents for companies wanting to list on the ASX. The due diligence involved in drafting and verifying a formal disclosure document is time consuming and expensive and can be prohibitively slow, costly and onerous for small businesses.
This article forms part one of a two-part series which unpacks how your business can attract angel investors.
How Can Investors Invest?
Under Chapter 6D of the Act, specific exemptions permit offers without a disclosure document including:
- Small Scale Offerings,
- Offers to Sophisticated Investors,
- Offers to Professional Investors, and
- Offers to people associated with the company.
You can read more about the specific exemptions in our capital raising roadmap.
Small scale offerings are generally for raising money from family or friends. This is a limited pool and is not usually a source of funds for businesses who want to raise more than a few hundred thousand dollars.
Where Can I Meet These Angel Investors?
Companies commonly meet angel investors, or ‘sophisticated investors’, through their personal network, including email and LinkedIn, or angel investor groups in their respective States.
Angel investors typically invest between tens of thousands and hundreds of thousands of dollars each and generally invest in groups.
What Do I Include In My Investor Deck?
You first will need an elevator pitch that is a short, compelling snapshot of your business and why investors may be interested in speaking to you. It is a brief discussion that you can conduct via email.
Once the investor agrees to hear more, you will need to create an investor deck – a concise, accurate summary of your business covering:
- Why is your product needed?
- What problem are you helping to solve?
- Who is on your team?
- How does your product or service provide a solution?
- What is your marketing strategy?
- What are your financials?
- What is your exit strategy?
It should also include a strong disclaimer to help you protect your information and show investors that your offer complies with the relevant Chapter 6D exemptions.
What Percentage Do I Issue For What Price?
You may engage in considerable negotiations with your angel investors on the value of your business and the percentage they will purchase in exchange for their investment.
If financially viable, you should consider getting professional advice on valuing your business from an accountant, business advisor or broker. A professional can also assist with analysing your financial position and importantly, understanding valuations in your industry and comparables for your business. A professional advisor can also help you calculate your business’ goodwill value and estimate future profit.
You will then need to choose a valuation method to value your company. How you do so depends on the industry you are in and the current value of similar businesses.
A preferred approach to valuing your business, particularly if it generates revenue but not yet makes a profit, is a ‘multiple method’. The method’s premise is that there are similar companies to yours. The multiple is how many times valuation is bigger than the revenue. Comparable companies in your industry determine the multiple.
So, Multiple x Revenue = Valuation.
Another common method is the return on investment (ROI) which uses your business’ net profit to value your business. To work out your ROI, you will divide the net profit (before the owner’s salary) by the selling price.
If you have any questions regarding capital raising and attracting angel investors to invest in your startup, please get in touch. One LegalVision’s experienced startup lawyers would be delighted to assist.